For those who want to invest but are not interested in assets that take a long while to yield profit, making liquid investments is your way out.
One major indecision that accompanies long term all-in investment is the question of, how soon would it yield profit? What if I can’t wait long and want to pull my money out? Or worst of all, what if I need money for an emergency?
What you should know
Through liquid investments, you can make investments that allow you to get your money back as quickly as the same day. Liquid investments are however short term, and many are not as beneficial as long-term or maybe some are. It all depends on the peculiarity of the situation.
What are liquid investments?
Liquid investment means investing in assets that you can convert to money (in cash) easily, without a huge drop in value. You can trade such assets for money and have a value that remains the same whether as cash or an asset.
The best example of liquid investments is money market funds (stock and bonds), cash, and shares of public companies that are actively trading on the stock exchange market.
Liquid investments must have the following characteristics:
- It must have a large number of interested buyers.
- There must be an established market.
- Transfer of ownership must be a simple process.
When is an asset not a liquid investment?
Assets or investments that take a long amount of time to be converted to cash, cannot be a liquid investment. They call them illiquid or non-liquid investments.
Also, if a conversion to cash causes a drastic drop in their original value (cost as an asset), then such investment is not liquid.
We cannot say real estate for example to be liquid, because it takes a while to convert to cash. There might also not be ready buyers, and should you choose to sell your asset, it results in a significant drop in its price.
Another example of illiquid assets
Real estate is a long term investment, and sometimes selling your asset might see you earn less than your original investment value, depending on the market. Another good example of illiquid investment is hedge funds due to the regulations that may surround you selling it.
Keep in mind that some liquid investments could also become illiquid investments under duress. This could happen if the stock market freezes, and they allow no trades (like the attack on Sep 11th, 2001 that lead to close of NYSE for that day).
List of liquid investments to make
- Cash on hand: this is the most liquid type of asset to have because no selling needs to occur. Cash can settle liabilities anytime.
- Bonds: they can easily sell bonds with little or no change to their market value. They are highly liquid, and also one of the best liquid investments to make.
- Stocks: selling your stock asset is now as easy as running the transaction on your mobile phone. You can sell stocks for the same price you purchased them or more than their value, although you can lose money too by trading. Stocks fluctuate a lot and is probably not the best place to invest if there is a possibility of pulling out for an emergency.
- Checking account: although checking accounts have relatively low rates compared to saving accounts, it is another good liquid investment to make in a short term. Checking accounts are special bank accounts that allow unlimited deposits and numerous withdrawals.
- Certificate of Deposits (CDs): certificate of deposits allows you to invest your money in the bank while promising not to withdraw it for a particular amount of time. In exchange for this, you get higher regular interest rates, and at maturity, you can withdraw your capital along with its interest. Although not highly liquid due to withdrawal limitations, certificate of deposits remains a good liquid investment.
- Money market accounts: this account works like CDs. The bank pays you higher interest rates than regular accounts, although there are restrictions on how much withdrawals you can make per month. Money market accounts are highly liquid.
- High yielding savings account: opening a savings account is an excellent way to earn interest on your investment. The financial institution pays you a certain amount for depositing money into your account.
- Mutual funds: mutual funds are like an investment pool where you put in money, which you invest in low risk and low yielding financial assets. These assets are highly liquid (e.g. bonds and stocks).
- Exchange-Traded Funds (ETFs): exchange-traded funds are like mutual funds but more liquid. This is because unlike mutual funds, you can trade your investments during market hours.
Advantages of Liquid Investment
- You can exchange easily for cash to meet emergency needs.
- Liquid investments assume the value of cash, therefore you can buy new investments without being sold off first.
- Liquid investments carry lower risk than illiquid ones during market fluctuations. This is because you can sell them off easily compared to non-liquid assets.
- They offer you a stronger financial profile such that you would have a higher success chance while applying for loans.
Disadvantages of liquid investments
- Liquid investment assets are prone to price fluctuations and can in turn affect your financial worth. For example, stocks dropping by 30 percent would mean you now have 30% less cash than invested. Fixed assets are not prone to such fluctuations.
- Liquid assets are worth what they are worth, no negotiations, therefore there is no chance of selling it for a higher price like non-liquid assets.
Liquid investments are the best when you like your money to stay close, but still want returns like an investment. Also, they can convert to cash in time of market uncertainties.
All these qualities make liquid assets the best for short-term investment. However, remember to stay away from exorbitant fee withdrawal and risky investments.